Using a Family LLC In Your Estate Plan

Family LLC - Estate Planning

If you have a complex estate, including properties to be maintained and stock portfolios to be managed, a family LLC may be a logical choice. Find out how using a family LLC in your estate plan can protect your family from estate taxes, and can improve your family’s management of your assets before and after you are unable to manage your affairs yourself.

What is a Family LLC Used for?

A Limited Liability Corporation (LLC) is a business entity. It provide owners, sometimes called members, protection from liability and flexibility in handling their business affairs. There are also tax benefits to forming a “pass-through” LLC, streamlining the filing process and allowing each member to be taxed solely based on their share of the business.

LLCs can be “member-managed” or “manager-managed.” In a member-managed LLC, one or more of the shareholders acts as the company’s managing partner, overseeing the business and its affairs. A manager-managed LLC hires a CEO or other employee who does not have shares in the company to take care of the affairs of the business. In a member-managed LLC, the business will generally have two types of shareholders:

  • Managing members (who are involved in the day-to-day running of the business)
  • Non-managing members (who simply own a share of the company and its assets)

In family LLCs, the “business” being done is the maintenance and support of the family. These LLCs can be used to transfer property from one family member to another family member without triggering significant tax consequences. The founding parent forms the LLC with the state and then transfers their assets into the name and control of the business. Once the LLC is funded, the parent can sell or gift their children or other family members shares of that business.

Generally the founder is the managing member, overseeing the affairs of the family LLC while they are alive. After the founder’s death or incapacity, another family member may step into the management role, or the family LLC may hire an attorney or other professional to manage the remaining assets.

Advantages to Using an LLC for Estate Planning

The primary advantage of using a family LLC for estate planning is in avoiding estate and gift taxes. Generally, transferring property from your personal accounts into an LLC is not a taxable event. Once an LLC is funded, you must work with your estate planning attorney to determine its valuation based on its assets (and any liabilities, like a mortgage). This creates the basis for any future transfers of shares.

The value of a non-managing member’s shares are far lower than the founder’s basis in the same assets. This is because the non-managing member has less control over what the business does with those assets. The family member receiving a gift of non-managing member shares is taxed based on this lower asset value (sometimes up to 40% less). This allows the founding member to transfer larger amounts of money and property to their intended heirs without triggering estate and gift taxes.

Family LLCs also move assets out of your name. After you pass away, the probate court must generally oversee the transfer of any property held in your name to your intended beneficiaries (under a Will), or natural heirs (under the state’s intestacy laws). However, a family LLC’s assets belong to the business, not you. If your family LLC and estate plan are set up properly, those assets won’t pass through probate. They also won’t count as part of your estate for federal estate tax purposes.

Warnings About LLC Estate Planning

Family LLCs require some formal paperwork to set up and maintain with the state. You will need to work with your estate planning attorney to create and file articles of organization and a formal LLC operating agreement, as well as pay the required fees. In Florida, the managing members of any LLC must also file an annual report and pay an annual fee each year. If they don’t it could threaten the LLC’s standing as an independent business entity. If the business dissolves for failure to file these reports, each member will be responsible for his or her own share of the family LLC’s assets, and the tax consequences attached to them.

Once a family LLC has been formed, the family must be also committed to maintaining the corporate structure for assets belonging to the business. If members act as though the LLC’s assets belong to them directly, it could “pierce the corporate veil” and eliminate the liability protection granted by creating the family LLC in the first place.

Also, most mortgage companies will not automatically approve transferring a mortgage from an individual to a family LLC. Before you commit to the structures and filing requirements of an LLC, be certain you know that your creditors will honor the assignment of your debt to your family LLC.

Is a Family LLC the Best Way to Manage Your Estate?

A family LLC is one of several estate planning strategies that can remove assets from probate and protect them from creditors. Whether it is the best option for you will depend on your personal financial situation, your heirs’ comfort in working with business assets, and the potential costs of maintaining the LLC as measured against the tax benefits. This isn’t always the best solution, but when it is, it can save families substantial sums in estate and gift taxes, and shield their assets from creditors.

At Harrison Estate Law, we know how to make good use of family LLCs in estate planning. We can help you weigh the costs and obligations connected to establishing a family LLC, prepare and file the paperwork with the state, and execute your chosen estate plan to take full advantage of the protections it offers. Please contact us online or via email or call 352-559-9828 to schedule a free consultation. If you don’t live close to Gainesville or are practicing social distancing, we are happy to set up a phone or Zoom call.

Categories: Estate Planning